I righteously and justly make fun of Richard Murphy and his, ahem, considerations of matters economic. But just for the one time I’ll do him the honour of taking him seriously – and still show why his ideas don’t work.
This is about modern monetary theory. Much of which is actually right in its basic ideas, it’s the application to the real world that doesn’t work. So, here’s Murphy:
The first is that as a matter of fact all government spending is paid for out of money newly created for the purpose and that this is then cancelled by taxation. I would argue that this is simple fact.
And the second is that this money creation process can be undertaken until such time as real physical constraints are met in the economy, after which if it continues then inflation will follow.
Far from being a prescription for inflation creation then, MMT does in fact provide both a very precise description of when demand-pull inflation might be created in the economy by suggesting that money creation should be curtailed when there is no excess capacity in the economy (this constraint being applicable to both government and private bank created money) and it provides two mechanisms for addressing that inflation. One is to stop the money creation, either by limiting government spending in that situation, or by limiting bank lending. The other is to tax that inflation out of the system.
MMT is then the friend of those who would like to control inflation. Professor Stephanie Kelton explains this very succinctly here, making clear in the process that it is not the availability of money that constrains a government from fulfilling its plan: its whether or not they can actually be delivered on the ground that does that. But what is never true is that MMT is a prescription for inflation: indeed, it could be entirely reasonably argued that it provides the best mechanism for controlling inflation that we now know of given that monetary policy is now almost wholly ineffective given that real rates are at or close to zero.
I’d not particularly argue with any of that. All is possible, certainly, the details of money creation and so on are correct. Sure, I always insist upon the distinction between money creation and credit creation, something MMTers tend not to. But still. Let’s take that as both a reasonable description of MMT and also something that’s at least potentially possible in the real world.
So, why won’t it work in the real world?
Strip it back a little. Government can and should boost demand until the economy is up at the production boundary. Do more than that and we’ll get inflation. Do less than that and we get the equal horror of unemployment and thus poverty. Certainly, an economy working at less than capacity is leaving everyone poorer than they need be.
OK, fine with that. So, what other economic policy prescription has made the same claims? Keynesian demand management made exactly those claims in fact. And the mechanisms to be used were fine tuning of spending to boost or restrain demand, plus fine tuning of taxation to boost or restrain demand.
Keynesian demand management used spending and taxes to manage demand. MMT would use spending and taxation to manage demand. Keynesian demand management didn’t work. MMT won’t either then, right?
There are two reasons why not of course. The first being the standard Hayekian point that the centre simply cannot know enough about an economy to gain the ability to do this successfully. There’s data in abundance of course, but not information.
The second is that the incentives faced by the politicians doing this management don’t lead to that potentially optimal outcome. The influence of those incentives is always – as the 1970s showed – to continue the spending and not worry about the inflation.
That we now call this idea MMT rather than Keynesian demand management doesn’t change those two basic problems. Nor does the manner in which we’re concentrating upon monetary creation and cancellation change those two problems which will inevitably lead to failure.
And that’s the real problem with MMT. Far from it being something new it’s only a new method of doing something we know won’t work. Which is why MMT won’t work in the real world either. You know, nice try, no cigar economics.